The Greek Banking Sector is Rebuilding

The Greek banking sector has taken an absolute hammering in the past 6 months, losing 86% of value on the back of capital controls and the impact of political uncertainty stifling economic activity.

Source: Bloomberg

The impact of mass withdrawals by panicked households resulted in a leakage of approximately €37 billion out of the banking system. Furthermore, the high incidence of non-performing loans resulted in reduced solvency among banks, amid poor economic conditions for households.

Returning Balance

For the proper functioning of Greece’s systemically important banks, the ECB has determined that €14.4 billion is required to make sure that they can remain solvent under an adverse market scenario. This figure pertains to the National Bank of Greece, Piraeus Bank, Eurobank Ergasias and Alpha Bank. What it represents is an acceptable level of capital to ensure that these banks are solvent in the event of an adverse market scenario and are based on a 2017 time horizon. Under a baseline scenario, the capital needs shrink to €4.4 billion.

It was hoped that this baseline capital requirement could be funded entirely by private investors; this has largely been successful. Alphabank and Eurobank’s rights issues met the required level, and National Bank of Greece (NBG) recently closed their rights issue, falling short of their target by €0.29 billion (despite deep discounts to market price). NBG have stated they will need to have another rights issue at the end of the month to meet the shortfall. Piraeus Bank is still tapping the market; their rights issue is simply not in high enough demand. Piraeus possesses the largest bad debts book out of the 4 systemic banks in Greece, which evidently accounts for the market’s pessimistic valuation.

Restoring Confidence

In the event of the adverse market scenario playing out, the Hellenic Financial Stability Fund is ready to disburse €10 billion, with a further €25 billion committed in the longer term.

Regarding the assumptions used in the European Central Bank’s modelling process, baseline assumptions were based upon those used when drawing up the third bailout agreement. The adverse market conditions were chosen based upon what would likely occur should the Greek economy be exposed to significant external developments which affected business and consumer confidence. They also accounted for political uncertainty.

It is hoped that once these recapitalizations occur, the banking system can stand on its own feet and the government can slowly roll back capital controls, facilitating a smooth and orderly financial system which can resume lending operations.

A few risks do, however, remain for the Greek banking sector:

A key risk identified by Fitch Ratings is a change in regulation regarding deferred tax assets (DTAs), which the banks are using as a means to bolster their capital figures. European regulators are keen to have the recognition of these assets reduced for the purposes of demonstrating solvency; if this desire is exercised then capital requirements will swell.

The size of the non-performing loans section of the banks’ balance sheets is still worth consideration; in the event that economic conditions get tougher, they could be particularly toxic.

Political Risk: After the latest bailout measure was voted into place, Prime Minister Tsipras saw his parliamentary majority slip by 2 seats. The latest reform measure was passed through parliament after winning the vote 153 to 137 (giving him a 3 seat majority). Whether Tsipras can cling on to this majority remains an enduring risk to Greek equities.